In Closing Act, Wachovia Lays Bare Extent of Woe

In what is likely to be its last quarterly report as an independent company, Wachovia Corp. laid bare the balance-sheet issues that pushed the Charlotte company to the brink of failure and into the arms of two prospective buyers.

To clean house before selling itself to Wells Fargo & Co., the winning bidder, Wachovia recorded a staggering third-quarter loss of $23.9 billion, or $11.18 a share. The loss included a litany of hits, the biggest being an $18.8 billion goodwill charge largely associated with the 2006 purchase of Golden West Financial Corp.

The results released Wednesday also showed the severity of a deposit runoff that had led to government intervention, an initial agreement to sell Wachovia's banking business to Citigroup Inc., and the eventual deal with Wells. That deal is expected to close in December.

The $764.4 billion-asset Charlotte company, adopting a long-standing Wells strategy, offered prerecorded remarks on its performance in lieu of a traditional conference call with analysts. The loss was Wachovia's third in as many quarters; its $9.1 billion loss in the second quarter included $6 billion of goodwill impairment.

Robert K. Steel, who became Wachovia's president and chief executive just three months earlier, spoke briefly on the recorded call. He implored listeners to "close our eyes and imagine" the benefits of the Wells deal.

The task of reporting the grim details was left to David Zweiner, Wachovia's chief financial officer, and Kenneth Phelan, its chief risk officer. Both joined the company about a month ago after their predecessors were ousted. A Wachovia spokeswoman said no executives would be available for comment.

Howard Atkins, Wells' chief financial officer, said in a statement that the massive charges were "prudent" and will allow the company "to put these losses behind them." All the costs were "consistent with our acquisition assumptions."

A spokeswoman for the $623 billion-asset Wells said it would not comment further. (The Federal Reserve Board approved the merger on Tuesday. See related story page 3.)

Golden West remained front and center as the catalyst — or scapegoat — for the third-quarter performance. Mr. Zweiner said 63% of the goodwill impairment came from the business line that houses Golden West's legacy pick-a-payment mortgage book.

As had been the case in previous quarters, the credit hits were felt in more than one portfolio. The results included $2.5 billion of losses tied to the investment portfolio and structured products, $682 million of valuation declines from principal investing, $515 million of severance costs, $497 million of costs from settling auction-rate securities issues, and $397 million from planned securities losses.

Revenue fell 22.7% from the second quarter and a year earlier, to $5.8 billion.

Analysts were left with the daunting task of determining how much of the loss was a discretionary cleanup and how much was a direct result of a quarter that many executives at other companies had called the worst in recent memory.

Wachovia managed to clear decks on several fronts, but the results revealed the problems left behind for Wells.

The pick-a-pay portfolio Wachovia inherited from Golden West shrank 2.7% from the second quarter, to $118.7 billion. Mr. Phelan said that the portfolio's projected cumulative loss rate had been raised to 22%, or $26.1 billion, and that only two-thirds of the loans were eligible for refinancing into traditional mortgages. About $4.1 billion of deferred interest remais on the books and homes in the pick-a-pay book are selling for 43% less than they value of the loans, he said.

Gary Townsend, the CEO of Hill-Townsend Capital LLC, said that despite the array of charges, "by and large nothing could have pushed them to where they are today except for Golden West."

Nancy Bush at NAB Research LLC said that the "shocking" numbers were "so outside the bounds of normal," that Wachovia would have reported roughly half the loss if it were not selling itself. "We now need to hear from Wells how they're going to resolve all this stuff."

Wachovia's loan-loss provision gave proof that eroding credit quality extended beyond the troubled mortgage portfolio. The provision rose 19.1% from the second quarter and 16-fold from a year earlier, to $6.6 billion, with about half the costs associated with portfolios other than the pick-a-pay one. Nonperforming assets jumped 26.1% from the second quarter and fivefold from a year earlier, to $15 billion. Nonperforming consumer loans rose 22.3% from a quarter earlier, to $9.3 billion, and souring commercial loans rose 20.6%, to $4.1 billion.

Mr. Phelan said during the call that Wachovia had "modest increases" in chargeoffs for middle-market and large corporate clients — something other companies have flagged this earnings season.

A "sizable and abrupt" outflow of commercial core deposits at the end of the quarter was primarily responsible for the liquidity crisis that pushed Wachovia to the brink of failure, Mr. Zweiner said.

He attributed the bleeding to Washington Mutual Inc.'s failure and the sale of its banking operation to JPMorgan Chase & Co. Since making its deal with Wells "we have begun to see our commercial deposit trends improve," he said.

Deposits fell 6.5% from a quarter earlier and 0.7% from a year earlier, to $418.8 billion as of Sept. 30.

The runoff outpaced efforts to shrink the loan book, which decreased 1.2% from a quarter earlier but grew 7.4% from a year earlier, to $482.4 billion.

Slight growth in commercial lending offset a 3% drop in consumer loans from a quarter earlier.